5 warning signs about your household debts

The duality of human nature embraces the idea of debt. It delights when it helps us buy homes, investments, entertainment appliances and vacation condos. It's a demon when it consumes us.

American International Group Inc. prompted a federal takeover because of debt's dark side. Lehman Brothers Holdings Inc., which filed for bankruptcy last week, was immolated by it. Other firms will be torched by it. There's no reason you should.

The institutional-debt fire-storm and credit crisis has raged through world financial markets with a vengeance and no one knows when or how it will end. Has consumer debt become the latest flash point?

As the economic reckoning continues, some 10 million Americans have filed for bankruptcy since 2000. One in seven families is dealing with a debt collector. In the past two years, more than 3.5 million have received foreclosure notices.

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Most Americans are tapped out after an orgy of borrowing during the Age of Froth, a time in which credit was handed out to anyone with hemoglobin.

The bacchanal was enormous: Some $1.2 trillion in home equity was borrowed against from 2002 to 2007, says the public-policy group Demos in New York. That debt was created to largely cover other obligations such as credit-card bills, which total almost $1 trillion or $17,000 per household for those carrying a balance, according to the Federal Reserve Board.

As Wall Street knows all too well, managed debt can be beneficial as long as it doesn't destroy your cash flow. Here are some personal financial truths that work in any market:

If you pay your credit-card bill within a grace period, you don't have to worry about added fees or finance charges. Yet you need to know that under present law, credit-card companies can change terms at any time for any reason. Read the fine print.

Vigilance is your best defense. The most fundamental question to ask is whether your debt load prevents you from paying essential housing, medical, food and non-discretionary bills. If so, pay it down and give yourself some breathing room.

Does debt stop you from saving? You need to first save for short-term goals and emergencies. U.S. Treasury bills, Inflation-protected savings bonds and federally insured certificates of deposit are still reasonably secure vehicles.

Are you keeping up with or beating inflation? Most salaries are not. If your debt payments prevent you from investing in a globally diversified world portfolio, you are falling even further behind.

A mortgage isn't necessarily an investment. You can pay down principal to get rid of it over time, if that fits into your life goals. If it's not something you can afford in the first place, there's no shame in downsizing or renting.

If you need help to streamline and pay down your debts, find a certified debt counselor, but avoid the numerous debt consolidators on the Internet. A good source is the National Foundation for Credit Counseling.

As Wall Street has demonstrated, leverage is good in the short term, although if it's not managed or transparent, it's like drinking and driving.